Final answer:
In democratic government, the principal-agent problem involves a misalignment between the electorate's interests (principals) and the government officials’ actions (agents). Solutions to this problem include increasing transparency and accountability to ensure the government acts in the best interest of its citizens.
Step-by-step explanation:
The principal-agent problem in a democratic government actually assigns the role of "principal" to the citizens, not the government. The government officials are the "agents" who are elected to serve the interests of the "principals," or the citizens.
In a democracy, the principal-agent problem arises when there's a discrepancy between the actions and decisions of elected representatives (agents) and the preferences of the electorate (principals). This can occur for several reasons, such as information asymmetry, divergent incentives, or lack of accountability. One notable example is when elected officials prioritize projects that benefit their local constituents over the broader national interest. This behavior can lead to suboptimal policy outcomes that do not align with the collective good of society.
Addressing the principal-agent problem involves improving transparency, increasing accountability, and encouraging voter participation to ensure that democratic institutions indeed function 'of the people, by the people, for the people' as envisioned by President Lincoln.